Local government bond plan in limbo
Back in July 2012, a shortfall was identified in a defined benefit superannuation plan of which many Victorian local council employees are members, but an initiative to resolve the issue seems to have stalled.
The defined benefit plan was compulsory for council employees from 1982 but closed to new members in 1993. Unlike state and federal government defined benefit schemes, this one must be fully funded, at all times.
In 2012, the Municipal Association of Victoria advised its members that the actuary of the plan, for which Vision Super is the trustee, had identified a shortfall of A$453 million. About $400 million of that was attributable to the councils.
Investment market volatility in the second half of 2011 was identified as the primary cause of the shortfall. Deteriorating investment performance in global markets, changed actuarial standards, and a reductions in bond rates were all contributing factors.
The actuary advised that payments would need to be made from 1 July 2013 to address the shortfall. The MAV commenced negotiations to make these payments over a 15-year period.
By July 2013, the MAV had successfully negotiated a 12-month bridging facility with Commonwealth Bank. The bridging facility provided consolidated funding to 42 councils that both reduced the councils' usual borrowing costs and also met their funding needs in relation their defined benefit pension fund obligations.
EY facilitated the arrangements after advising the MAV and its members that there were benefits to be gained from a centralised negotiating process for obtaining bank funding or even undertaking bond issuance.
The 12-month bridging facility was to be replaced by a permanent funding structure or a bond issuance program.
Out of this came an initiative to establish a pooled borrowing vehicle for all term debt borrowing requirements of the MAV's 79 Victorian council members - the Local Government Funding Vehicle. New Zealand's successful Local Government Funding Agency provided the model.
EY again worked with the MAV to develop the LGFV and oversaw the appointment of the Commonwealth Bank and National Australia Bank as lead arrangers for the inaugural LGFV bond issue. An issue of five or seven year bonds was scheduled for July.
The bonds would be issued as secured obligations of MAV, which in turned would be backed by the rate revenues of the participating councils. An Aa2 rating from Moody's Investor Service was mooted.
More recently the launch date was moved to September but now that deadline has passed too. The MAV's website is silent on the matter and Moody's has not announced the assignment of a rating to the LGFV.
Development of a municipal bond market in Australia has been discussed for just as long as there has been discussion and debate about development of a deep and liquid corporate bond market. Progress has been made with the latter but not with the former.
Local councils in all states have a history of dysfunctionality and dismissal by their state governments. And while this has been limited to a small minority, state governments have been loath to let councils enter into term debt borrowings without strict oversight.
Approval from the local government minister is typically required for any major borrowings. These are then sourced from a bank, or term debt funding is provided by the state's own treasury corporation.
Councils borrowing under these arrangements pay a premium that reflects their individual credit risk. Any collective borrowing may reduce this credit risk premium but will come with the contingent risk of mutual liability for all borrowings incurred.
New Zealand's LGFA is jointly owned by the New Zealand government and 79 councils. The ownership structure provides the LGFA with implicit government support, which has seen the credit ratings assigned to LGFA aligned with those assigned to the New Zealand government.
The challenge of locking in implicit, or even explicit, federal or state government support for a LGFV and mutual liability across participating councils could well be the stumbling block.